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MLM: Pyramid scheme, or free business coaching with performance-based compensation?

In the course of either promoting my business or describing to others what I do as a professional networker, I find that many individuals have little understanding about how the industry of network marketing, or multi-level marketing (MLM), actually works.

For those who have some exposure to the industry either directly or indirectly, perception tends to fall on one of two opposite ends of the spectrum: they either know someone who is making more money than seems rationally feasible/legal, or they know someone who has racked up a garage full of product and never made a dime from their business. In reality, there are people in each category, as well as a significant, nondescript middle-class segment which comprises the “full-time” established networkers that earn, on average, nearly twice the national median annual household income (at least for those affiliated with my corporate partner).

If only I had been properly approached with the concept of network marketing while I was an undergraduate student, I may have reconsidered my choice of profession at an earlier age. After all, the average full-time compensation of network marketers cited above is far greater than that of electrical engineers, even while EEs command among the highest salaries of new graduates with either Bachelor’s or Master’s degrees. Of course, compensation is not the sole determining factor in selecting a career, but it was a significant consideration for a pragmatic student such as myself (and a widely touted selling point for the curriculum by faculty in the EE department).

Ironically, I was exposed to network marketing as a freshman in college by an acquaintance from high school, though unfortunately he was poorly trained in how to conduct his business. “Randy” was a senior when I as a freshman, and we had both played in orchestra together while in high school. I remember one day receiving a call from him out of the blue; we had not been in contact since he graduated from high school nearly four years earlier. He mentioned having “something to run by me,” and I happily accepted his request to stop by as I thought it would be great to reconnect with someone from high school, especially since I had not yet established a large number of friends in college.

Randy arrived at my dorm room within a few minutes, sat down in a chair on the other side of my cramped quarters, and began our brief conversation with the phrase, “Where do you see yourself in five years?” My reply was, “Is this an ________ pitch?” (referring to one of the most recognizable company names in the MLM industry). His response was, “How did you know?” and I indicated that it sounded like a pitch for that company, even though I had never been approached by someone with that company or in the industry before. He left my dorm room, obviously discouraged, and I never heard from him again. In reflection, I’m not sure how I could even have made a connection between his approach and his particular company, much less the industry, since I had no education or background in the subject. Apparently I had tapped into some collective consciousness that somehow equated agenda-driven, inauthentic communication with MLM, even though I had no real understanding of the business model.

Regardless of how my preconception was formed, the approach taken by Randy stood as a barrier of communication between two old acquaintances who otherwise could have not only reconnected personally but may have formed a precocious business alliance. Individuals who utilize Randy’s approach when addressing any individual, regardless of intention or industry, are likely to encounter a similar response when they have not first connected meaningfully with another individual. This approach also does nothing to help overcome the objection some may have regarding network marketing as a scam or otherwise over-hyped pitch.

Certainly, there is no shortage of fraudulent scams in place today. Scams have always existed and probably always will, especially since technology can facilitate their reaching even more people with greater ease now than ever before. I receive a half-dozen or more of these duplicitous emails each week, among the more recent looking to capitalize on the stimulus package administered by the IRS. While many intelligent people can readily separate the wheat from the chaff, an otherwise healthy dose of skepticism can sometimes hamper one’s ability to reasonably evaluate a new idea or concept if it does not match a prior paradigm or belief system. Consider how the measurable effects of global warming have been ignored for decades simply because many people live in places where they still experience snow in the winter and conclude that global warming is nonsense simply because cold winters still exist! Unfortunately, a similar leap of irrationality is sometimes drawn between network marketing and fraudulent operations such as a pyramid scheme or Ponzi scheme. While there are much more detailed explanations of this distinction available, I offer a nutshell version below:

Pyramid scheme: promise of profit gained for recruiting other individuals into the scheme (at a cost) without moving any products or services as a legitimate business

MLM: identical to any traditional company except in how it chooses to market its products or services

A network marketing or MLM company advertises its product or service through a network of entrepreneurs who market the company’s products/services via word-of-mouth. These people earn commissions based on their effectiveness in moving the company’s products and services to customers through their own teams of affiliates, as opposed to more traditional advertising methods (e.g. celebrity endorsements, national TV or print ad campaigns, etc.). Those whose marketing efforts generate the most product sales make the most money, not those who “started at the top.” It’s a simple concept, but it is unpopular with the excuse-prone who would rather blame the model rather than be accountable for their own failings as entrepreneurs.

Simply stated, network marketers are paid for moving product and teaching others how to do the same, with the greatest financial reward resulting from their effectiveness in the latter. In this business, one’s ability to teach and work in collaboration with others is far more lucrative than one’s skill as a point-of-sale professional. As networkers, we are mentored and, in turn, grow to be mentors of others who also want to build their own businesses. We are rewarded when we are able to help others achieve success as they define at their own scale, whether this equates to “mad money,” supplemental income to help pay household bills, or ultimately a means to replace one’s job.

Do I believe network marketing is a good fit for everyone? Absolutely not. Neither is engineering, holistic health, performing arts, investment banking, or any other professional career. Simply because starting a business in this industry can be done on a shoestring budget, with no formal education, and with no prior related experience, it does not imply one will be successful at it or find it to his/her liking.

Success in this industry is most probable for one who is teachable (i.e. adopts a “beginner’s mind”), has a desire to teach/coach/mentor/connect with other people, and commits to taking effective, daily action to grow his/her business. Results are not instantaneous but rather the fruition of committing to a process over time. This aspect is no different from that which is required to achieve a meaningful outcome in any lasting endeavor of value: earning a degree, obtaining/maintaining personal fitness, gaining experience and higher levels of responsibility in a corporate structure, building lasting personal relationships, etc. The difference with network marketing, however, is that building this business to maturity may be done in a part-time fashion (as opposed to being a full-time student or employee) and it yields ongoing fruit for this cumulative effort (residual income). This is in sharp contrast to merely developing the skill necessary to continue trading time/labor for a pay check (linear income), even if at a higher hourly rate when having obtained specialized training or education.

Having started my networking business 2.5 years ago, I am grateful for the mentors who have helped me build it to a level which has paid me weekly, residual commissions for more than a year now. In turn, I look forward to continue helping others with a similar desire to learn/teach the same. Furthermore, the business and interpersonal skills I have learned from this venture have greatly facilitated the expansion of my private practice as a therapeutic bodyworker, as well as serving as an educator in holistic health. Hopefully this provides some perspective to those who are evaluating the industry of network marketing with a healthy dose of skepticism and wonder not only, “Is this legal/ethical?” but for most people, “Can I do this?”

5 thoughts on “MLM: Pyramid scheme, or free business coaching with performance-based compensation?”

Wow, great article. I too have a successful business in network marketing and it is a wonderful business model that can create a solid and secure income. Everyone knows the best form of advertising is word of mouth. Network marketing just uses the best form of advertising with leverage to create a business model that, done correctly, grows exponentially. And like you, I have received benefits far beyond the weekly paycheck. The lessons I have been taught about business, organization, management and even basic psychology have helped me in all areas of my life.
Well done!

I agree, there are legitimate opportunities out there if you know where to look. The MLM industry have been given a bad reputation because of the disreputable actions of the pyramid scam artists. The promise of big money lures many sales distributors to join up under a pyramid scheme business model that can’t last.

True, unfortunately there are bad apples in every industry and profession.

Fortunately, we all have a choice as to whether we set an example of professionalism and bring value to others. By making this choice, we are able to help those who are willing to receive it in the form of business mentorship, personal growth, and of course directly by means of the products/services which we provide with our respective companies.